Just wanted to share some of the main points:

• Yes, the fact that there were strikes is significant. But no, the actual effect of those strikes has not been significant because of their limited scope.   (It is, however, important to get at the underlying reasons for those strikes.)

• Yes, workers are becoming more demanding and more vocal.

• [My favorite] Yes labor costs are rising but no, this is not the end of China as a production base.  This is because rising labor (and other) costs are not a new phenomenon, and because labor costs constitute a fraction of overall manufacturing costs in China.  Some manufacturers may move inland or out of China, but…

“China is still an attractive option for most companies looking for an effective manufacturing base, although many companies have been pursuing a China plus one or a China plus two strategy in recent years to diversify their manufacturing operations,” said Geoffrey Crothall of the China Labour Bulletin in Hong Kong, which advocates for improved workers’ rights.

“I really don’t think we’re going to see companies suddenly leaving China en masse.”

• Yes, in some cases supply chains may be impacted, but no,  it doesn’t look like a significant issue with regards to stocking strategies.

• Yes,  the Chinese government will likely to play a greater role (by more stringent enforcement of labor laws,  and by encouraging collective bargaining)  in balancing the needs of a more assertive workerforce with those of industry.  But no, it will not allow independent labor unions.

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A pair of recent articles in the South China Morning Post offer some more perspective on the much-predicted exodus of manufacturing from the Pearl River Delta and why, for the most part, it just ain’t gonna happen. (a paid subscription is required to access SCMP articles, but a 14-day free trial is available).

One article, Minimum wage rise doesn’t worry all China plants, is mainly about how minimum wage hikes don’t affect those who aren’t complying with the minimum wage law.  It also also discusses the how two manufacturing groups well established in the PRD,  garments and toys, are likely to react to rising labor costs.

First, according to the article, garment makers (40% labor content) gotta hit the highway…

Willy Lin Sun-mo, vice-chairman of the Hong Kong Textile Council, said: ‘Now, setting up a factory 500km from Hong Kong is okay, but several years ago, most Hong Kong factories were in a 100km radius from Hong Kong. The only way is to move further away. There is nothing much we can do. Rules are rules, so Hong Kong manufacturers have to pay.’

Hong Kong garment factories had difficulty paying ever increasing wages, as labour accounted for 40 per cent of the cost of a garment, he said. ‘If all garment factories have to raise salaries by double digits overnight, how can they compete?’

but toy makers  (20% labor content) ain’t going nowhere…

A Hong Kong toy executive said he knew of a handful of toy factories that moved from Dongguan to more remote cities in Guangdong this year, namely Heyuan, Shaoguan and Qingyuan.

Toys are among Hong Kong’s biggest export industries and most toy factories are in Guangdong.

The impact of the minimum wage increase had not been too severe on Hong Kong’s toy industry, said the executive. Labour accounted for 20 per cent of the cost of making a toy, he estimated.

The toy industry was informed of the wage rise months ago, so they factored it into the cost of their products, said the executive. ‘We will raise the prices of our toys by about 5 per cent. Customers have to accept the higher prices because all toy factories in China are affected.’  [Note from DJL:  I wonder how much of that 5% increase could be offset by gaining efficiencies in the manufacturing processes.]

The second article, Factories likely to stay in Pearl River Delta,  shows why  moving factories out of the PRD just to chase cheaper labor probably doesn’t make economic sense.  Among the economists cited are Paul Krugman.

US economics Nobel Prize winner Paul Krugman, in his book Geography and Trade, says it is often uneconomical to move manufacturing from costly but established manufacturing coastal areas to lower-cost distant locations.

It is more profitable for manufacturers to keep factories in places like the Pearl River Delta than to relocate to cheaper but more remote places. The reason: convenient and cheap transport infrastructure, a large pool of migrant workers and a network of small to medium-sized manufacturers. Thus, the cost of setting up a new factory in Xinjiang is higher than keeping one in southern China.

It goes on to to quote Willy Lin Sun-mo, as did the previous article. This time, however, it quotes him to illustrate that  even for labor intensive industries that need to move, moving out to chase cheap labor may incur hidden or at least less obvious costs:

Knitwear maker Willy Lin Sun-mo, chairman of the Textile Council of Hong Kong said: “A sophisticated supply chain takes decades to develop, just like the Pearl River Delta, which took some 25 years to come to what it is today.”

Lin set up a knitwear plant in Jiangxi province about 18 months ago to take advantage of the labour market but said he had managed to employ only half the 3,000 staff needed. “Labour shortage is not just a problem in Guangdong,” he said. “Insufficient labourers mean higher wages, a big threat to manufacturers.”

Danny Lau Tat-pong, chairman of the Hong Kong Small and Medium Enterprises Association, said relocation made sense theoretically but doubted that many firms would make such a costly move…

Yes, labor costs have increased, and it will mean readjustments for many factories.  I’m still guessing, though,  that relatively few will move from the PRD’s  mature manufacturing infrastructure to “cheaper”  places with questionable transportation facilities and without the extensive network of integrated parts, materials and service providers to which they are accustomed.

By the way, a related SinoFactory posts from the past may be of interest: Coming to China, but NOT for cheap labor!

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However one report in The Japan Times indicates that Dongguan, at least, is still welcoming foreign investment.

A vice mayor of the Chinese industrial city of Dongguan urged Japanese manufacturers Friday to expand on its turf and exploit its domestic market to help the city recover from the global economic crisis and fall in exports.

“We are looking for more Japanese manufacturers to build R&D (research and development) centers in our city and create domestic brands, securing distribution routes,” Jiang Ling, vice mayor of Dongguan in Guangzhou Province, said at a news conference in a hotel in Minato Ward, Tokyo.

In many ways, what Jiang is saying is in lockstep with what the central and Guangdong governments seem to be promoting– focus on domestic consumption, R&D and high-tech manufacturing.

But what makes Jiang’s comments interesting are that he’s actively courting foreign investment, stating clearly that it essential for the area’s recovery.  Moreover, he’s speaking on behalf of Dongguan’s townships and villages, and these are the organizations which will be interpreting and implementing whatever policies flow down from Beijing and Guangzhou.

While this doesn’t mean that Dongguan is a good place to set up labor-intensive manufacturing, it does indicate that Dongguan, at least, is still Foreign Investment friendly.

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Seems accurate enough.   But what caught my eye were the last two paragraphs,  sharing the stated views of a famous Chinese labor activist:

[The activist]…once incarcerated for his efforts to establish an independent alternative to the government-sanctioned All China Federation of Trade Unions, notes that the last thing the country’s labour movement needs is more martyrs rotting away in Chinese prisons for daring to challenge the Communist party’s authority. Far better, he adds, to focus on factory-floor issues that affect workers’ daily lives. [emphasis mine]

As [he] said in an address to Hong Kong’s Foreign Correspondents’ Club earlier this year: “Why not let workers and employers settle their problems [independently] at factory level? That’s the best way to make a harmonious society.”

What does he mean by “factory-floor issues that affect workers’ daily lives”?   It looks like he’s telling us workers rights will improve not by workers banding together to cause unrest, but by going to the gemba and working together with management to ensure  that their working lives are safer, more comfortable, and more productive (with the assumption that increased productivity means increased compensation for the worker).

Not news to me… I’ve said elsewhere that LEAN, JIT, and related strategies and concepts can do more than just add value for shareholders and customers, but can add value for the workers and for the community as well.   What surprises me is hearing it from labor.

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It just doesn’t scare me as it might.  As with the articles of the past, it highlights a few anecdotes (albeit fresh ones)  about unpaid workers protesting, official malfeasance in controlling the press, an extortion scheme perpetrated by an unemployed worker.

I guess if I didn’t live here and have the perspective that I do, this article might send shivers up my spine.

Maybe not.

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There’s more rumbling in the press about the possibility of China suspending (or choosing to ignore) the year-old Labor Contract Law (LCL). The following, from a recent  Wall Street Journal article (subscription required) suggests that the Dongguan City Government may be supportive of this effort, as it may help to mitigate the impact the downturn is having on enterprises operating there.

To aid businesses, Beijing has permitted local authorities to freeze minimum-wage levels and to reduce or suspend employers’ social-insurance contributions.

The vice mayor of Dongguan, in Guangdong, says many employers hope the central government will suspend the Labor Contract Law, and his office has sent that request to Beijing. “We can’t ourselves halt the implementation of a national law,” says Jiang Ling.

Giving business such leeway could ultimately undermine trust in the still-developing rule of law, says Andreas Lauffs, a partner at the law firm of Baker & McKenzie who focuses on Chinese labor issues.

As an employer in Dongguan, I hope this doesn’t happen for at least two  reasons.

It helps keep an even playing field:
While the LCL may be flawed (I don’t think the open-ended contracts are reasonable) it does help to ensure that the rules are stated, contracts signed, and that the existing Labor Law is followed.  That means that those of us who WANT to follow the law are not so easily undercut by those competitors who can take advantage of the murkiness of unenforced laws.

Happier, healthier community:
Those of us who live and/or work in areas where migrant laborers abound would like to see them develop into a happier and more satisfied population.   If my workers are happy but the workers in the surrounding factories are not, the entire community suffers.

Just my 2 cents worth.

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